Internal Audit in Banks and the Supervisor's Relationship with Auditors: A Survey

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BCBS  | 
01 August 2002
Status:  Current
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 |  16 pages


1. Strong internal control, including an internal audit function and an independent external audit, are part of sound corporate governance. In banks, these are also important for the safety and soundness of operations and can contribute to an efficient and constructive working relationship between bank management and banking supervisors. Appropriate communication between banking supervisors and banks' internal and external auditors will improve the effectiveness of audits and supervision.

2. In August 2001 the Basel Committee on Banking Supervision issued its best practices paper Internal audit in banks and the supervisor's relationship with auditors (the Internal Audit Paper), which highlights the important work of internal auditors in banking organisations and the need for cooperation between banking supervisors and banks' internal and external auditors.

3. Importantly, the Internal Audit Paper calls for a permanent and independent internal audit function in all banks, and provide a number of guiding principles concerning internal audit. As its starting point, the paper emphasizes the responsibilities of the board of directors and senior management in the areas of internal controls, risk measurement and compliance with laws and regulations. The importance of internal auditors independence is also underlined. Accordingly, each bank should have an internal audit charter, which has been approved by senior management and confirmed by the board of directors, to enhance the standing and authority of the internal audit function. Because the operations of modern banks are increasingly complex, internal auditors must have adequate professional competence and apply risk-focused approaches in their work. The Internal Audit Paper further notes that the work of banks' internal auditors can support banking supervisors' work. Banking supervisors should therefore have periodic consultations with each bank's internal auditors to discuss the risk areas identified and the measures taken.

4. The survey results presented in this report indicate that the important principles for internal audit that the Basel Committee promotes are obtaining general acceptance within the banking industry.

5. The Basel Committee issued an updated and expanded version of its paper The relationship between banking supervisors and banks' external auditors1 in January 2002. This document was jointly developed with the International Auditing Practices Committee (IAPC).2 The Basel Committee and the IAPC share the view that a greater understanding among banking supervisors and external auditors of their respective tasks and responsibilities will enhance the effectiveness of each party's work.

6. The Basel Committee documents referred to in this paper are available on the website of the Bank for International Settlements at

The Survey

7. The Accounting Task Force of the Basel Committee conducted a survey during 2001 and 2002 to find out how key arrangements have been made for the internal audit function in a sample of banks in 13 countries. Structured around the principles set forth in the Internal Audit Paper3, the survey also looked into the relationship between banking supervisors, internal auditors and external auditors. This report, which has benefited from input from the Institute of Internal Auditors (IIA), presents a broad overview of the findings of the survey.

8. The survey covered the banking supervisors and 71 banks in the following countries represented in the Basel Committee: Belgium, France, Germany, Italy, Japan, Luxembourg, Netherlands, Spain, Sweden, Switzerland and the United States. Austria and Singapore, observers in the Committee's Accounting Task Force, also participated in the survey.

9. The information about banks that was gathered in the survey is based on the national supervisory authorities' own knowledge, supplemented with interviews of internal auditors and others in a sample of banks of various sizes in the participating countries. Even though the sample may not be representative of the state of internal audit in the banking industry in all participating countries, the survey provides useful results. The findings of the survey should however be read with some caution as this type of survey may provide somewhat biased answers.

1This document is also known as International Auditing Practice Statement 1004.

2 The IAPC has been renamed International Auditing and Assurance Standard Board (IAASB).

3Principle 10, concerning the review of the bank's internal capital assessment procedure was not included in the survey, as this assessment is not yet a formal part of the Basel Capital Accord.